The Frank Value Fund Institutional Class returned 6.22% in Q1 2023 compared to 7.50% for the S&P 500 TR Index and 1.32% for the Russell Midcap Value Index. Please see the end of this letter for more performance information.
We are pleased the fund outperformed 95% of the mid-cap value Morningstar category in the first quarter. We are building on the great performance of 2022 and are confident in our portfolio for 2023 and beyond.
Batten Down the Hatches or Open the Beach Umbrella?
In the first quarter of 2023, the US markets ping-ponged wildly from expectations of interest rate cuts to increases, a recession “soft landing” to “hard landing” to “no landing,” and a potential banking crisis to a non-event. Rather than chase what is working, (which seems to change every week) we have structured the Frank Value Fund portfolio largely in defensive companies, all with shareholder friendly policies and/or value-realizing catalysts. The fund’s ability to concentrate in these types of investments has increased alpha and reduced risk relative to its Morningstar category. Let’s examine one such catalyst.
A Special Treat for Shareholders
On January 12, 2023, Opera Ltd. approved a special dividend of $0.80 per ADR share. A special dividend is a one-time lump-sum payment, and Opera’s equated to a one-day return of 12.9%. This dividend continued the shareholder-friendly ways of Opera management that had been an integral part of our investment case. The company is producing cash and sending it to shareholders, and these types of investments are rare. By having a concentrated investment in Opera, the Frank Value Fund disproportionally benefits from shareholder friendly events relative to investing in an index. Of course, you won’t find Opera in almost any index, and if you can, its heavy insider-ownership precludes it from being a major part.
Though volatile, Opera’s share price has appreciated materially since our initial investment in April 2022. The company has authorization to repurchase over 50% of the float (shares held by everyone but insiders.) The excess cash required for special dividends and share repurchases comes from rapid growth in the company’s web-browsing business. The hype over artificial intelligence applications like Chat GTP have alerted users to their choice in web browsers, and Opera’s early adoption of new technology is consistently winning customers in developed countries. When we purchased Opera it was at a “deep-value” price. Now, as Opera’s valuation has increased, its mid-teens revenue growth expectations still place it at a discount to other growth companies.
Notice the above discussion and investment case on Opera had no mention of the 2022 bear market in other technology stocks, the Ukraine war, the US yield curve, or any other macroeconomic concerns. When we find compelling investment ideas that fit our process, forces within the company working to recognize value can overwhelm the highly correlated US equity universe. If billion-dollar macro hedge funds can be caught off-guard and lose hundreds of millions of dollars misreading economic signals, why should fundamental investors try to compete? Instead, by staying within our process, we find ideas that control their own destiny. The investment industry often leaves companies for dead. Quality management teams like Opera’s take advantage of these orphaned stock conditions and use the company’s strong cashflow to tilt the playing field in the shareholders’ direction. Great things happen, like superior returns and lower relative volatility, when we stick to our process.
Opportunities in Mispricing
We tell the stories of our individual stock picks to highlight the inefficiencies in modern equity markets. The Frank Value Fund only invests when target companies reflect a large discount between trading price and intrinsic value. Today, the numerous defensive names we own are already priced for recession while high-flying technology names we do not own are priced as if everything is fine. This disconnect is what we call a margin of safety. The pessimistic scenario can play out, but we have done our homework and are comfortable holding the portfolio. We find it hard to believe investors in tech stocks, where some are still trading over 10x price/revenue, will avoid panic and locking in losses if the economy ends up in a recession.
Brian Frank – Frank Value Fund Portfolio Manager
|Performance as of 3/31/23||Total Return||Average Annualized Total Returns|
|YTD||1 Yr. %||3 Yr. %||5 Yr. %||10 Yr. %||Since 7/21/04 %|
|Frank Value Fund||6.22||3.35||10.97||6.25||5.51||6.49*|
|Russell Midcap Value||1.32||-9.22||20.69||6.54||8.80||8.98|
|S&P 500 Total Return||7.50||-7.73||18.60||11.19||12.24||9.43|
* Represents an estimate based on the performance of the Fund’s Investor share class, adjusted for fees.
Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. You may obtain performance data current to the most recent month-end by calling the Fund at 1-888-217-5426 or visiting our website at www.frankfunds.com. Returns include reinvestment of any dividends and capital gain distributions.
Non-FDIC insured. May lose value. No bank guarantee. The Fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus contains this and other important information about the Fund, and it may be obtained by calling 1-888-217-5426. Please read it carefully before you invest or send money.
This publication does not constitute an offer or solicitation of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this publication has been obtained from sources we believe to be reliable, but cannot be guaranteed.
The information in this portfolio manager letter represents the opinions of the individual portfolio managers and is not intended to be a forecast of future events, a guarantee of future results or investment advice. Also, please note that any discussion of the Fund’s holdings, the Fund’s performance, and the portfolio managers’ views are as of April 3, 2023 and are subject to change without notice.